The 2022-23 Economic Crisis Megathread

[Zanza]

There might be a gas shortage this winter, but by winter 2023/24, enough new LNG terminals, inner-European pipelines, consumption reductions, more heat pumps, different industrial processes and better insulation etc. will have been realized to make it manageable. 

Also on renewables, China is strong because it is cheap. They don't have an inherent advantage like the fossil fuel producing countries from geology. Their strengths can be copied by the West - at a cost of course. It's not like there is no knowledge or capacity to make wind generators or solar cells in the West. One of the many poor decisions the Merkel government did was to stymie the quite dynamic German solar and wind industry. Also rare earth minerals are mainly rare at a given price point, not rare when looking at actual deposits.

By the way, the first German LNG terminal is now expected to come online around Christmas, the second shortly afterwards. Pretty fast when you consider how long such projects take here normally.

[Tamas]

So how is the imminent Iraqi civil war with Iranian intervention going to affect things?

[Sheilbh]

There might be a gas shortage this winter, but by winter 2023/24, enough new LNG terminals, inner-European pipelines, consumption reductions, more heat pumps, different industrial processes and better insulation etc. will have been realized to make it manageable. 

[...]

By the way, the first German LNG terminal is now expected to come online around Christmas, the second shortly afterwards. Pretty fast when you consider how long such projects take here normally.

Yes - and crucially Freeport is coming back online (which is about 20% of US LNG export capacity) after their repairs. Because the other side of this has been that major exporters like the US and Australia have been running at pretty close to capacity anyway.

I think there's a short-term re-structuring of the European market. No-one is going back to Russia after this but we're not in a place to move entirely to LNG - but we'll be going far more in that direction, plus more pipelines with Iberia/North Africa and maybe a little bit more from the UK and Norway. I think it's going to be about 2-3 years for that which will be bumpy - I'd be surprised if we are back to "normal" this side of 2024. The other side of this is that there is an existing and growing Asian LNG import market with especially China importing more gas so we're moving from a more fixed, in theory "secure" pipeline market to one that is more exposed to market shifts and has big players. I'm not sure how "normal" prices return to without something like a second shale revolution. We might be passing a peak this winter, but I think we'll be going onto a plateau for a while (again - in my view economics, security, morality, climate all point in intensifying energy transition and we just need to do lots of everything).

And looking at the next 2-3 years, even looking at this winter, the big unknown is weather. Part of the reason supplies have been good is that demand's been low because of a heatwave so the weather's been relatively benign. If we have a harsh or early winter then what this winter looks like is more uncertain, but that also applies for the next few years.

Also on renewables, China is strong because it is cheap. They don't have an inherent advantage like the fossil fuel producing countries from geology. Their strengths can be copied by the West - at a cost of course. It's not like there is no knowledge or capacity to make wind generators or solar cells in the West. One of the many poor decisions the Merkel government did was to stymie the quite dynamic German solar and wind industry. Also rare earth minerals are mainly rare at a given price point, not rare when looking at actual deposits.

Yes. I think my point is just that we do it now and not after the crisis happens as was the case with PPE or Russian gas.

[Zanza]

So how is the imminent Iraqi civil war with Iranian intervention going to affect things?

If you want doom and gloom,you should look at the worst drought in the Northern hemisphere in 500 years or so. Rivers drying up in Europe and China...

[Zanza]

On market intervention the EU is now considering to change its market-based energy pricing mechanism that basically has the marginal price of the most expensive energy source as main mechanism to determine prices. Also coupling electricity with gas prices. It is not clear how they want to reform it, but major market intervention is coming. This will of course affect the the rest of Europe as well, e.g. the UK.

Separately, Germany will stop to distort gas demand as the fill grade of storage is now deemed sufficient and the basically unlimited amount of tax money to buy gas will now be curtailed. This will mean that German gas shortage will no longer be exported as inflation to the rest of Europe (at least not as much).

[Gups]

On market intervention the EU is now considering to change its market-based energy pricing mechanism that basically has the marginal price of the most expensive energy source as main mechanism to determine prices. Also coupling electricity with gas prices. It is not clear how they want to reform it, but major market intervention is coming. This will of course affect the the rest of Europe as well, e.g. the UK.

I was wondering about the link between electricity and gas prices. Hope this proceeds.

[Syt]

Meanwhile, in Vienna ...


https://www.reuters.com/business/energy/austria-prepares-pump-billions-into-vienna-power-firm-hit-by-price-jump-2022-08-29/

Austria prepares to pump billions into Vienna power firm hit by price jump

VIENNA, Aug 29 (Reuters) - Austria said on Monday it is preparing to pump billions of euros into the electricity company that supplies much of Vienna after a price surge on power markets left it unable to afford the guarantees needed to cover market transactions.

Wien Energie, which is owned by the City of Vienna, asked the federal government for help at the weekend and the city has identified an "acute financing need" of 6 billion euros ($6 billion), the finance ministry said in a statement.

"The federal government has the instruments and the will to help the City of Vienna in this financial emergency. It is about ensuring security of supply for two million people, which must happen," the ministry said, adding that talks were ongoing and there remained "many questions".

The ministry said it was considering a loan worth billions of euros, to be handled by the Federal Financing Agency that issues government bonds and other debt instruments.

Wien Energie pointed to a "sudden explosion" in the European power price on Friday - to 1,000 euros from 700 per megawatt-hour (MWh) - that it said increased the size of the guarantees required on the market, even for contracts concluded in the past where delivery is pending.

Earlier on Monday, Uniper (UN01.DE) requested more financial help from the German government, raising the bill for bailing out the utility group to 19 billion euros as soaring gas and power prices burn up its cash reserves.

Wien Energie sells power futures, contracts to supply power it will generate in as much as two years' time, while also buying power and gas on the market in long-term deals, it said in a statement. Most of its power generation comes from gas-fired plants.

"Wien Energie and (its parent company) Wiener Stadtwerke are solid, economically healthy companies with excellent credit ratings. No losses need to be covered," the company said.

As Austria's biggest energy provider by number of customers and the one with the biggest gas-fuelled plants, it is the hardest-hit by market-price pressure, it added.

https://www.reuters.com/business/energy/vienna-power-firm-denies-speculating-futures-it-seeks-state-loan-2022-08-30/

Vienna power firm denies speculating in futures as it seeks state loan

VIENNA, Aug 30 (Reuters) - Vienna's main power company, which has asked the federal government for billions of euros in credit to cover margin costs so it can keep trading on the European power-futures market, denied on Tuesday that it had made speculative trades.

Wien Energie, which provides much of the Austrian capital's electricity and gas, appealed for help this weekend after the European power market hit record highs, driving up the so-called margin deposits the company must keep on hand to trade.

The City of Vienna, which owns Wien Energie through parent company Wiener Stadtwerke, points to assistance schemes for companies in such situations in neighbouring countries such as Germany, arguing Austria should have such a scheme of its own.

"The interesting thing is that, since the German issue keeps coming up, Wien Energie would probably not have been able to avail itself of this German umbrella scheme because speculation is not allowed at all," Finance Minister Magnus Brunner, a conservative, told reporters on Tuesday.

Funding talks are taking place in a context of political rivalry between the conservative-led national government and the Social Democrat-led government of the City of Vienna.

Wiener Stadtwerke and the city government rejected Brunner's accusation.

"There is no speculation at Wien Energie," Wiener Stadtwerke's deputy chief Peter Weinelt told a news conference.

European power futures fell on Tuesday to 651 euros ($652) from all-time highs above 1,000 euros on Monday, after European Commission President Ursula von der Leyen said the European Union was working on emergency intervention in the market. In January prices stood at 100 to 150 euros.

Vienna's finance chief Peter Hanke told the news conference the city was currently in talks with the federal treasury on a credit line of two billion euros although given Tuesday's price fall it was not needed yet.

[Zanza]

On market intervention the EU is now considering to change its market-based energy pricing mechanism that basically has the marginal price of the most expensive energy source as main mechanism to determine prices. Also coupling electricity with gas prices. It is not clear how they want to reform it, but major market intervention is coming. This will of course affect the the rest of Europe as well, e.g. the UK.

I was wondering about the link between electricity and gas prices. Hope this proceeds.

I think the reason why gas is even used under the current merit order mechanism is that you can start and stop gas powerplants fairly flexibly - unlike most other power sources. Otherwise it would be prohibitively expensive and would be priced out of the market.

[Sheilbh]

On Berk's point a sign of how constrained supply is - via Bloomberg Singapore reporter, companies are making "patchwork" LNG shipments by mixing leftovers from larger shipments (which can be dangerous and is rare) to sell into Europe:
https://twitter.com/sstapczynski/status/1564827463779516416?s=21&t=3NcnLmzqqz_HxdRoySsV4A

There's financial shenanigans and issues in the market - but at its heart I think there is an issue with supply.

[Syt]

Austria introduces an electricity price cap from December this year (I think) till summer 2024. A household's power consumption up to 2900 kWh is capped at a price of 0.10 EUR for consumers. Above this, market rate applies.

There's some concerns re: fairness. Me, living alone, I easily stay under that cap. However, if you're a family of four ... not so easy. There's additional benefits for low income households, but not sure if that will buffer everything.

[Sheilbh]

Austria introduces an electricity price cap from December this year (I think) till summer 2024. A household's power consumption up to 2900 kWh is capped at a price of 0.10 EUR for consumers. Above this, market rate applies.

There's some concerns re: fairness. Me, living alone, I easily stay under that cap. However, if you're a family of four ... not so easy. There's additional benefits for low income households, but not sure if that will buffer everything.

There was an article on why the UK was going for a blunt energy price cap for all consumers. From the reporting it sounded like the key issue is the same fact that shapes every policy for a modern state: databases.

Basically the energy providers don't know household information or income. Parts of the state know bits but they don't all talk to each other. So providing really targeted price cap is difficult and requires building something new or a big IT project linking various databases, while you can do an energy cap for everyone using existing databases quickly even if it's blunt and expensive - I wonder if there's something similar shaping policy there?

Plus you can support lower income households through the tax system or welfare system where they have the data.

[Syt]

Plus you can support lower income households through the tax system or welfare system where they have the data.

That's how they're currently planning extra benefits at the moment, e.g. households exempt from paying TV license fee will get an extra payment from the state to cover some additional electricity costs etc. The Austrian state is generally a bit stingier in its welfare model, but they'll use it for their planned measures. There was another one previously where the city of Vienna sent a 150 EUR coupon to everyone that they could then send to their energy provider (I received it and submitted it, but I earn a few hundred per year too much ). The thing with sending the money to the consumer is that you can't guarantee it will be used for the intended purpose. I'm generally not one to say poor people will spend it on booze, but I can see cases where persons may have to choose between paying energy bills or another, similarly important expense (rent, food ... ). I think vouchers would therefore be better, but that again relies on people jumping through the administrative hoops of using them properly; and that also might be a challenge to some who struggle with organizing such things.

[Sheilbh]

This sounds very sensible but I really wish VdL hadn't used "flatten the curve" in describing EU measures on energy
https://twitter.com/disclosetv/status/1567462388898594816?s=20&t=xecdJLAf3B7IlYwT_El0ng

[Valmy]

Sounds like most of Britain's housing stock was built before 1900 so there are probably plenty of fireplaces to get through those long winter months. Hope you guys have wood stockpiled.

The chimneysweeps can finally get back in business.

[Josquius]

Sounds like most of Britain's housing stock was built before 1900 so there are probably plenty of fireplaces to get through those long winter months. Hope you guys have wood stockpiled.

The chimneysweeps can finally get back in business.

I wish. Stupid past owners took my chimney out and putting a glue in would be too much of a faff. Plus no idea how reliable my wood supply would be.
I think a majority of houses though they may have a sealed up chimney have a gas fire or nothing.
My parents however will be more than fine. Their entire side garden has been taken over by wood.